Monday, August 3, 2009

A Short Primer in Health Care Reimbursement: What's Really Wrong With the System, and How We Can Fix It

I smiled when I read the headline. That's how it is when you're an industry insider, and it is pointed out how many people have no clue how the health care system we currently have here in America actually operates. Following the national conversation, it dawns on me that those we have elected to build a new health care system on our behalf seem to have no clue as to how the the current system works either.

Unfortunately, it is not enough to know that it's too expensive, that lots of people are going bankrupt, or that a lot of people have no coverage. Moreover, I recently read that several legislators have simply thrown their hands in the air, frustrated by the apparent perception that it is entirely too complicated.

OK, so it's complicated; the learning curve is admittedly steep. In attempting to make sense of the seemingly inscrutable, so a wise man once told me, "Follow the money," and all will become clear. And so it was that I was motivated to share the fundamentals gleaned over a 30-year career of advising hospitals and anesthesiology groups on the intricacies of the health care reimbursement infrastructure in America.

Hospitals are an excellent place to start. It's true that corporate America has gotten into the industry in a big way. Bill Frist and Hospital Corporation of America exemplify this trend. But it must be realized at the outset that for-profit hospitals are not only in the minority, they must compete for patient load with a lot of Really Excellent not-for-profit hospitals on services and price. It stands to reason that if a for-profit hospital were making obscene profit-margins providing services to those wealthy enough to afford quality insurance coverage, BC/BS and their ilk would have made those facilities off-limits, putting them out of business in a big hurry. No, these facilities take their share of Medicare patients, although they dramatically limit the number of Medicaid patients, and rarely take patients with no coverage whatever, casually referred to within the industry as "self-pay".

In truth, the prices charged at private hospitals are often LOWER than at inner-city "charity" hospitals, as prices universally represent a facility's cost of providing services to everyone, spread over a steadily-shrinking patient population with the financial resources to pay "retail".

The formula by which prices are calculated bears examination, in the interest of the general enlightenment.

In determining "retail pricing of health care services" the total cost of providing care to everyone, including the costs of maintaining and expanding physical plant to address future needs as well, is divided by the total number of patients cared for during the previous fiscal year. This data is included in a "cost report", that is the basis for Blue Cross' approval of a facility's rates for the upcoming year. All Medicare payments from the previous year are totalled; Medicaid payments, negotiated fixed-rate payments from various HMO's and PPO's are totalled. These fixed-payer reimbursement amounts are subtracted from the total cost of providing services. At the bottom line, the number of patients remaining, ironically the sum of patients with insurance that covers what the facility actually bills, and those with no coverage at all who are forced to pay "retail" out of pocket, bear the burden of the remainder of costs passed on from what is now the greater bulk of the system. Broken, indeed.

So what happened to the system we could once afford? Before Medicare, before Medicaid, nearly everyone had insurance as an employee benefit, paid for by the great American corporations that were our industrial base, and the government so many of us worked for. With the cost spread out among 85% of the patient population, the cost per patient was manageably low. The total revenue to hospitals and doctors was substantial; physicians flocked to this country to get in on the obscene reimbursement being paid to physicians. What happened to those days?

An inherent flaw in a system based on insurance coverage for employees, arises when those employees retire. Corporations could not afford the increased cost to cover retirees, as costs increased as age progressed, and the majority of elderly went without. Medicare was originally intended to fill the gap between gainful employment and death. Hospitals and doctors were cool with this semi-socialized plan. To gain acceptance by physicians, Medicare was designed around a Usual Customary and Reasonable (UCR) reimbursement system. This was soon replaced by a cost-reimbursement methodology, in which a provider was required to demonstrate the actual cost of services, on a per patient basis. For facility providers, they needed only to share their cost-report, as had been done for years in determining allowable rates with Blue Cross anyway, and the Health Care Finance Administration would reimburse those costs. Perfect.

What about the other gap, the 15% who were unemployed, or under-employed, and couldn't afford insurance? Medicare worked so great, why not get onboard for Medicaid, too?

Unfortunately, Medicaid paid well below the cost-reimbursement level. OK, we simply took that on the chin and passed the shortfall on to the 85% who had insurance coverage, right? Well, sort of. We jacked up the "retail" to reflect this 8-15% deficit, and passed the cost on to Medicare and all the insurance patients. As the insurance patients' prices rose, the cost of insurance premiums rose to meet the additional cost of services. Over time, HCFA noticed the rise in costs in excess of the normal rate of inflation, and raised the red flag.

Medicare stopped paying for services based on cost-reimbursement, and in a misplaced effort to stem "rising costs" decided what was "fair reimbursement" in devising a calculated-flat-fee system of reimbursement based on Diagnostic Related Groups (DRG's). Unfortunately for the overall reimbursement infrastructure, these payments were below cost-reimbursement, although somewhat higher than Medicaid reimbursement. Once again the deficit was passed on to those who still paid based on what was being billed, now significantly higher than the actual cost of services per patient, in order to cover the growing deficit.

Enter HMO's and PPO's, that took advantage of employers' shock at the dramatic rise in retail prices being paid for subscribers, and their growing dissatisfaction with paying double or triple what premiums were just a few years before. These managed-care groups negotiated on behalf of large regional employers, putting the gun to the head of those facilities competing for these patients, the life-blood of the health care industry. The result was a negotiated rate structure that was consistent with the mainstream trend initiated by the federal government in a misplaced attempt to "control costs", and paid consistently below cost reimbursement levels. Medicaid rolls began to grow as states expanded eligibility parameters. Medicare rolls begain to grow as people lived longer, and the pre-boomer generation reached eligibility age. The "price of retail", simply a function of total number of patients whose coverage will even so much as cover the "cost of services", did the predictable thing.

Employer rebellion found them more and more opting for HMO's and PPO's that reimbursed along the lines of Euro socialist plans, below cost... leaving facilities in a very tough position. The retail price rose to reflect inceasing "cost-share" from Medicare, Medicaid, and some of the more onerous PPO's.

Health care coverage need simply cover the cost of providing services to each patient, in order to effect a dramatic drop in the price each of us pays for our personal share of health care. Perhaps it is the responsibility of a carrier to provide as minimum coverage, the documented cost of providing services, as evidenced by a cost-report submitted by any eligble provider; paying a provider below the cost of providing services constitutes a de facto transfer of financial responsibility for a contractual obligation incurred by the reimbursing carrier. Not insidious enough to be considered fraud perhaps, but certainly "low class" by consensus.

Today, with unemployment rising, and more employers dropping "health insurance that pays Retail", the $100 Tylenol, the $13,000 short stay surgery, the $1,200 pathology bill for reading your labwork results, all reflect the fact that less than 15% of patients are still charged retail. Those without insurance who experience catastrophic illness are literally ruined financially, when the hospital takes them to court to collect past due medical bills, confiscating their life savings, and the home they spent a lifetime paying off so they could retire in it.

It all seemed like such a great idea at the time, letting employers pay for health insurance so that the great middle class could enjoy health care previously available only to the wealthy. It seemed like such a great idea that the government could cover the cost of health care for the elderly and retired, and then for the indigent poor as well. Had every component paid at least the cost of providing services to its little sector of the patient population, it would have worked, too.

Now we have a real problem. The retail cost is so high, no one is willing, or able to pay for it any longer; it is once again available only to the wealthy. In order to reduce the cost per patient, the system has to be rebuilt such that every patient's coverage will pay the actual cost-per-patient that once appeared in the cost-report. That means that Medicare and Medicaid have to pay the original cost-per, before all the fixed-payers got into the program. Also, the PPO's and HMO's need to pay the same cost-per, as do all the other public option, single payer wannabe's, etc, etc.

When every patient's coverage pays the actual cost of providing services to each patient, the cost per patient that is "retail" will plummet. Instead of $40,000 per policy for the Cadillac of coverage, the retail price for that same coverage will be closer to $7,000 annually.

All of this has forced everyone in the industry to examine carefully what might be possible, in light of suggestions that we trash the whole thing in favor of welfare health care, essentially universal Medicaid coverage. There are some inherent flaws in such an approach, particularly in the long lines, long waits for scheduled surgery, and the denial of services to those sick enough that they're dying anyway, all characteristic of the European system.

Were we all capable of affording Amazing Coverage, the Cadillac plan now priced at $40K per year, we would love walking right in, and having doctors coming out of the woodwork to serve our needs. Were we all to have Cadillac coverage, the best and the brightest are attracted to health care as a profession. Hospitals could afford to have enough mammography machines to serve the population on no-notice requests for care. Those who are now "2nd Class" patients, the Medicaid patients in the inner-city hospital, would be accepted at the uptown "Doctors' Hospital", and treated with respect. Moreover, were these policies of ours zero deductible, zero co-payment, required by law to cover every possible medical expense including pre-existing conditions with NO out-of-pocket expense, then we would all have equal access to health care, regardless of income or social class, and our coverage would honestly reflect the cost of providing services to each and every one of us, exactly.

In fact, were we all to have this kind of coverage, the industry that now occupies 17% of GDP would probably grow to 20% of GDP, and perhaps more like 25% when we all had universal access to the system on a level playing field, rich and poor alike. The fundamental error in the criticism of such growth is that all that revenue goes into corporate profits of companies like HCA. In reality, with a little creative "watchdogging", this growth would actually translate to new jobs, excellent jobs, skilled jobs that pay well enough to support a family and buy a home. The growth in this sector would stimulate the general economy, dragging us out of the Great Depression of the Third Millenium.

That kind of growth could in theory generate more than a Trillion Dollars in new tax revenue, and take a serious bite out of unemployment... Applying Keynesian theory, or Reagan Voodoo Economics as it was known in the 80's, that kind of growth could come from a tax-cut (analagous to a shotgun approach to economic stimulus), as it could from a tax-credit (more analagous to a precision strike approach) that stimulated the general economy via the health care sector.

A Plan That Works

Which brings me, at long last to the suggestions based on an intimate knowledge of the system, what is wrong with it, and what it will REALLY take to fix it. Let me preface these remarks with the caveat that these suggestions carry the beneficial weight of a high likelihood of support by the AMA, the AHA, the AHIP, the AARP, PhARMA, big business, and every family in America.

First, in anticipation of universal coverage from SOME source, no provider, professional or facility can be permitted to pursue any individual patient for any balance due on any bill incurred in the provision of health care services. This will eliminate Immediately! the financial ruin of patients and their families by hospitals and physician offices.

Secondly, health insurance companies must be regulated by each state's insurance commission, such that a company's retained portion of paid premiums may not exceed a pre-determined percentage of the total of paid claims in the previous fiscal year. In addition, should paid claims be lower than anticipated in the actuarial tables, and retained premiums exceed the pre-determined percentage allowance, refunds must be paid to each subscriber on a pro-rata basis. Coverages should routinely carry zero deductible, zero co-payment; out-of-pocket expenses will adversely limit access to those who are unemployed, and living on public assistance. Needless to say, companies will be encouraged to pay claims, rather than deny them, as their profit-margins will be tied to total claims paid; denial of claims for any reason, including pre-existing conditions, will be counterproductive to the corporate bottom-line.

Thirdly, Medicare and Medicaid must immediately be revised to pay on a cost-reimbursement basis, or dismantled. The co-payment provisions for Medicare should be removed.

Fourthly, corporate for-profit hospitals must be regulated as utilities, by the Public Utility Commission, to limit profits to utility-scale.

Finally, if it is adopted, proposed public option coverage must follow the same cost-reimbursement, zero deductible, zero co-payment form as private coverage.

Paying for the Plan

I am a proponent of the Keynesian School, believing strongly in the Great Capitalist Machine and its ability to take stimulus money and turn it into a money-making system, creating jobs and making America great.

As such, I recommend a tax-credit system for financing health insurance premiums. I believe that when the final tally per family comes in between $5K and $7K, that the commercial insurance industry will jump at the chance to finance every tax-filer's family-coverage policy, if it means borrowing the requisite funds from the private sector on January 1, provided that a tax-credit will be available to each filer on April 15th of the following year, when that year's return must be filed. I also believe that over the 15 month period between those dates, this Capitalist Machine of which we are all so proud, and tenaciously protective, will grind the Trillion-Dollar grist fed into it, generating so much growth in GDP that the surge in income tax collected will nearly, if not entirely pay the entire cost of the tax-credit.

It is the essential advantage of promoting social change through the private sector, that the up-front financing of progressive reform can generate economic growth, rather than become a cost-burden on the taxpayer. The gift of growth or our economy, and the concurrent decline in our unemployment rate, might come to be at least as valuable as the health care itself.

The skeptics will say we'll all go bankrupt; I laugh, pointing my finger at more than the entire cost of health care premiums for every family in America having gone into the coffers of the Banking Sector. OK, in fairness, I'll respond:

It has already been predicted that at current growth rates, health care costs will reach 20% of GDP by the middle of the next decade. I propose that increasing health care as a sector of GDP to 25%, an overall increase of 50% in that sector. Particularly in the case of not-for-profit hospitals, an increase in health care costs directly translates to an increase in health care jobs. In a slumping economy with 10% unemployment, and a vanishing industrial and manufacturing base, how can this be a bad thing?

I further contend that the resultant eight-percent economic stumulus package is less than or equal to that pumped into the banking sector to save it.

Finally, health care costs are something in which we simply MUST all share as a society, in order that everyone has equal, unlimited access; financing it in this way gifts us with the Capitalist answer to health care reform, concurrently growing our economy and lowering unemployment by some 8%.

Because health care claims paid to hospitals represents money that is for the most part paid to everyone who works in them, this "cost" is quite literally an investment in this vital sector of our economy. Money paid to health care workers is soon paid into the general economy. Claims paid to physicians and other allied health care providers on the Part B or Blue Shield side pays their employees, and the doctors themselves. This money does not go up in smoke, it is spent on rent, mortgages, car payments and groceries.

It is also paid in taxes, back into the system. If there is sufficient growth in GDP, there might be enough to pay for the entire program. Nope, IMHO the program pays for itself. Regardless, we all need health care. At the bottom line, we all need health care; if the growth in GDP falls short of totally balancing the cost of premiums, no one will care.